First home buyers warned off buy now pay later

A Christchurch-based adviser is warning prospective first home buyers of the perils of using buy now, pay later, saying these transactions could work against them when they apply for a  mortgage.

Lending Choice director and senior mortgage adviser Adam Shepherd (pictured above left) said that current BNPL repayments were included in affordability calculations, which could lower a prospective purchaser’s borrowing power.

“Banks may factor the usage of these credit facilities when assessing [a borrower’s] overall creditworthiness,” Shepherd said.

The modern version of a traditional layby, BNPL gives the consumer immediate possession of the goods. The service enables a consumer to pay a portion of the price upfront, with the balance paid over a set number of instalments.

Talking to NZ Adviser about how BNPL transactions can impact a homebuyer’s borrowing power,  Shepherd said that affordability calculations for mortgage applicants could be challenging, noting that main banks’ test rates currently range from 8.75% to 9.50%.

Each bank has its own way of factoring in BNPL commitments when determining the level of borrowing a person can service, he said.

“Westpac considers 3.8% of the BNPL facility limit when calculating borrowing power. For instance, each $1,000 facility limit could reduce borrowing capacity over a 30-year term by $4,500,” Shepherd said.

“ANZ on the other hand assess the average amount paid over the last three months. For instance, if the average monthly BNPL spend is $500, it could reduce borrowing capacity over 30 years by $65,000.”

Impact of BNPL transactions on credit scores

BNPL providers may report missed payments to credit bureaus, which can adversely impact a borrower’s credit score, Shepherd said.

“When a client fails to make payments as agreed upon in the BNPL agreement, it reflects negatively on their character and [ability] to fulfil their financial obligations as they fall due.”

Centrix June data shows that 10.4% of BNPL accounts were in arrears and that demand for BNPL was up 2.2% year-on-year.

Amid concerns that BNPL could be creating financial hardship for some consumers, Minister of Commerce and Consumer Affairs Duncan Webb has committed to finalise CCCFA regulations for BNPL by the end of the Parliamentary term.

National MP for Port Waikato and spokesperson for small business, revenue, commerce, consumer affairs and manufacturing Andrew Bayly (pictured above right) told NZ Adviser that just over 25% of Kiwis had a BNPL account – a figure that had remained consistent over the past 18 months, according to Consumer NZ.

“If you apply for a credit card or a bank loan, there is an obligation that properly assess that you can afford to repay the loan,” Bayly said.

While there had been some changes to BNPL lending, particularly a cap of $600 per transaction, the National Party is concerned that people can have multiple BNPL accounts that can lead to a “debt trap”, he said.

“National is monitoring the lending the situation closely and will make changes if necessary,” Bayly said.

BNPL industry responds

In response to concerns raised by Shepherd and Bayly, BNPL providers Afterpay, Laybuy and Zip provided a joint statement to NZ Adviser.

A spokesperson for the companies said buy now pay later represented a safer, low-cost and more transparent alternative to traditional credit products, giving consumers choice and confidence in how they managed their finances. 

“As an emerging innovation that’s generated significant savings for consumers and competition to financial services, consumers should be empowered with the knowledge that they’re making the right decision for their circumstances – not the bank’s vested interests,” the spokesperson said.

“While having a BNPL account may be a consideration when calculating a person’s borrowing power, consumers – and the financial institutions serving these people – should understand the facts.

“In New Zealand, the average BNPL transaction is less than $150 and the average outstanding balance is around $250. Consumers must make their first payment upfront, before paying the rest in instalments over a few weeks or months, depending on the product, with no interest, ever.” 

The spokesperson said by comparison, the average credit card limit was upwards of $8,500 with an average outstanding balance of nearly $6,000 at an average interest rate of roughly 20%.

“Instead of pausing accounts at the first sign of non-repayment, a feature built into Afterpay, Laybuy and Zip, credit cards allow consumers to revolve in a cycle of expensive, high interest debt. Responsible lending shouldn’t mean consumers are told to shut down their BNPL accounts so that the bank can hand them a credit card with a much higher limit,” the spokesperson said.  

Strategies used with clients

Shepherd said that he thoroughly discussed a client’s existing debt commitments at the initial meeting.

“When we research and establish the client’s strategy and borrowing power, we discuss the impact that close and ceasing use of BNPL facilities will have on their borrowing power,” Shepherd said.

Given that taking on a home loan is a major commitment, this approach helps to consolidate the household budget, he said.

“If this strategy of clients closing and ceasing use of these facilities is presented to them at the time of making the credit application (not after), the banks are typically willing to exclude this commitment from their affordability assessments,” Shepherd said.

This presents a more consolidated client statement of financial position and allows clients to maximise their desired borrowing capacity, he said.

Are there any other impacts of BNPL transactions on a person’s financial position or their ability to apply for a mortgage? Share your thoughts in the comments section below.